Daily Challenge Day 31

My dad has two basic objections with respect to business:

  1. Selling time
  2. Customers paying for learning

Though he has never really clarified what he means or come up with a solution to the problems posed. He still multiplies a basic rate by an estimate of hours, then typically adjusts down based on gut feeling. May suggest that should have  a more rational approach and get rid of the gut feeling. But how to get rid of subjective judgement?

The Australian federal minimum, last time I checked was $17.70. Some individuals and community groups suggest that this rate is too low and inadequate to live on. If this fee was doubled to $35.40 there would still be people complaining it is not high enough. If it was halved to $8.85 there would be people who find it more than adequate to cover their needs. There cannot be any single rate that is adequate for all people. People who are on industrial awards with rates close to $100 or more still want higher rates. Some people object to equity in wages and want to ensure that there are relativities between occupations, suggesting that a given occupation should always be paid more than another, rather than based on value to a given business.

The other month I extracted the following information from Payscale:

Structural Engineer $70,565
Structural Drafter $45,032
Drafter CE $53,750
Advanced Diploma ME $77,300

As can be seen persons with an advanced diploma in mechanical engineering can get paid more than a structural engineer. The business employing the engineering associate is likely manufacturing a product with a high demand. The more revenue generated from the sales of the product, the more money the engineering associate can make a claim for, as they assisted to generate it.  There can be no doubt that the initial pay rate is little more than a subjective judgment, and individuals desire or a trade unions desire for a given amount of income.

Similarly time to complete a given task is not entirely certain, it is also variable, between a minimum value and an maximum value. Therefore we have two indeterminate numbers multiplied together to get a third indeterminate value. So we could take minimum and maximum values for the hourly rate, and likewise minimum and maximum hours for the duration, this in turn gives a minimum and maximum price. From these four values, two rates and two durations, we get four possible prices. Minimum rate by minimum duration (Minimum Price), minimum rate by maximum duration, maximum rate by minimum duration, maximum rate by maximum duration (Maximum Price).

The actual price for the project can be taken as either one of the two extremes or an average between the two. If choose the average then the job may take longer than expected and not cover its actual costs. If the maximum is chosen then may not make a sale.

If fix the fee for a project, then can measure the hours, and calculate the average hourly rate for the project. If like the average hourly rate for the project can use that rate for calculating the fee for the next project. But once again may not make a sale.

Some projects we can know the duration with reasonable certainty, but there will still be potential for variation which needs to be taken into consideration. For example we may know something takes 2 hour, but can vary by plus/minus 1 hour, so it can take either 1 hour or 3 hours to complete. Whilst something else may take 5 hours but vary by plus/minus 0.5 hours, so that actual time expected to lie between 4.5 hours and 5.5 hours.

The issue is the standard deviation on the average value. The greater the repetition of the activity and the less variation in the actual task, then the more consistent the duration taken, and the smaller the standard deviation.

A few years back I read the following article:

To Engineer or not? That is the question. By Edward Yannul, pg 27-29 Engineering World Oct/Nov 2005, Volume 15 No. 5

The basic idea behind this article is to estimate the engineering effort required for a task on the basis of 4 characteristics of the work:

  1. Degree of Change
  2. Technical Challenge
  3. Strictness of Goals
  4. Risk

The system then gives rise to four levels of engineering effort. I have tried several times to develop a pricing scheme based on this system. The system of determining engineering effort is still subjective, in other words it is still a gut feeling, and therefore price based on is still subjective.

However, the point of developing multiple characteristic weighting systems, as used in value analysis, is to reduce the standard deviation not eliminate the subjective judgement.

So work out a price however one chooses, take a subjective judgement as to whether like the price and believe the market will accept the price. If decide it is too high, then rather than simply lower, or severely round the value, instead adjust the value of one of the characteristics. For example change from high risk to low risk, change the estimated durations, adjust the hourly pay rate. Similarly if believe the price is too low, adjust the same factors but in the opposite direction.

At the moment I have price blocks derived from preferred number systems, adapted from the Renard series. There is more than one way for a price to fall into one of the block ranges. For example if believe drafters and engineers should have different pay rates. Then a job involving 80% drafting and 20% engineering, will have a different average pay rate than a job involving 80% engineering and 20% drafting. Now even though the jobs have the same duration they have different prices, because the average pay rates for the two jobs are different.

So dividing any of the prices by the federal minimum wage will give the maximum range of hours possible for a project at that price level for a minimum possible level of effort. Dividing by some higher pay rate for a greater level of effort will give the maximum acceptable hours for that price level. Yet still the level of effort can be increased and so can then average pay rate, and so the hours can be decreased.

So at the moment referring to them as price levels seems more useful than effort levels, as effort is still variable and hidden within the price level.

Anycase a job gets assigned to a price level, and thus has a fixed fee, and then the hours for the job can vary within limits which we find acceptable. The closer the hours get to those derived from the federal minimum fee, the less acceptable the job becomes as it is not able to cover the operating costs of the business and pay minimum wages. If such happens then the next time such  similar job comes around it gets assigned to a higher price level. {No! still doesn’t read right. It’s a job or project class. A project gets assigned to a class 1 to 10, which then in turn assigns a price.}